China property slowdown to hurt Australia

A slowdown in China's property sector coming at a time when Australia's government is clamping down on spending threatens to shave more than 1 percentage point off domestic growth.

Australia relies heavily on its iron ore exports to China and the disproportionate size of the Asian powerhouse's property sector, relative to other parts of its economy, means any impact will be felt locally.

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The residential property sector in China accounts for 24 per cent of steel consumption, with obvious signs of slowing, this has pushed the price of iron ore, one of Australia's most valuable commodities, into a correction, down 23.3 per cent in 2014.

"The impact that a slowdown in the Chinese property sector would have on the Australian economy is quite large and meaningful," Credit Suisse analyst Damien Boey said.

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"If you had a serious slowdown in Chinese property, which we are sort of seeing at the moment, you could easily shave off a per cent or so from the real GDP numbers [for Australia], unless of course you had offsetting policy stimulus, which we're not really seeing at the moment," Mr Boey said.

Instead, the Australian government is doing the opposite and slashing spending, while creating an atmosphere where households are likely to tighten their budgets to account for Medicare co-payments, the restructuring of family tax benefits, deregulated higher education fees, an increase to fuel excise and, for some, the so-called deficit levy.

Relaxing austerity and stimulating the economy underpinned Credit Suisse's real GDP forecasts of 2 per cent for Australia, with the government now doing the opposite, real GDP growth will probably start with a 1 handle in front of it, Mr Boey said.

Mr Boey said he believes there is a more than 50 per cent chance of a serious slowdown in China's property sector.

The trickle-down effects of a downturn in China's property sector threaten more than just Australia's miners.

"It will affect our resources export volumes, it will affect out commodity prices and to the extent that it affects both of those and corporate profits, then it could actually affect jobs and even housing," Mr Boey said.

China accounts for 30 per cent of Australia's exports, of which 80 per cent are commodities, so a correction in China's property sector would have serious implications for Australia, UBS economist Scott Haslem said.

"Growth in China closer to 5 per cent in 2015 would likely see us lower Australia's forecast for 2015 growth from 3.25 per cent, after 3 per cent in 2014, back closer to 2 per cent," Mr Haslem said.

UBS gives this scenario of 15 per cent chance of coming to fruition.

With demand for commodities expected to fall, the Australian dollar is likely to fall, along with a significant slump in mining investment.

Investment in the non-mining parts of the local economy may increase due to a lower currency, but it would not plug the gap left by the resources sector, Mr Haslem said.

China also faces the headwind of limiting its shadow banking sector over the next five years and it slowly undertakes reform to liberalise its economy. This will be a drag on Chinese GDP, PIMCO global strategic advisor Richard Clarida said.

"We think 6 per cent to 6.5 per cent is the better number over the next few years. Moreover, we agreed that China's current plans for a gradual liberalisation of its internal interest rate market and its external capital account will depend crucially on how the limits to shadow banking proceed," Mr Clarida said.